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4 Reasons Your Tax Refund Could Be Larger Than Last Year's

Matthew Frankel, CFP, The Motley Fool

The Tax Cuts and Jobs Act made the most sweeping changes to the U.S. tax code in three decades. To be clear, the changes won't result in a tax cut for everyone. For example, people who have high property or state income taxes could get hurt by the limited SALT deduction, and the higher standard deduction won't exactly work out favorably for everyone.

Having said that, the tax changes will indeed result in a lower federal tax bill for millions of Americans. Here are four specific reasons why you might owe significantly less income tax than you did last year.

Tax refund check with cash money on top.

Image source: Getty Images.

Marginal tax rates are lower

The most obvious reason you might owe less in taxes when you file your return this year is that the marginal tax rates in the U.S. are generally lower now. Here are the new U.S. tax brackets for the 2018 tax year (the return you file in 2019).

Marginal Tax Rate

Single

Married Filing Jointly

Head of Household

Married Filing Separately

10%

$0-$9,525

$0-$19,050

$0-$13,600

$0-$9,525

12%

$9,525-$38,700

$19,050-$77,400

$13,600-$51,800

$9,525-$38,700

22%

$38,700-$82,500

$77,400-$165,000

$51,800-$82,500

$38,700-$82,500

24%

$82,500-$157,500

$165,000-$315,000

$82,500-$157,500

$82,500-$157,500

32%

$157,500-$200,000

$315,000-$400,000

$157,500-$200,000

$157,500-$200,000

35%

$200,000-$500,000

$400,000-$600,000

$200,000-$500,000

$200,000-$300,000

37%

Over $500,000

Over $600,000

Over $500,000

Over $600,000

Data Source: IRS.

If you're curious, these are the 2018 tax brackets that were set to take effect before the passage of the Tax Cuts and Jobs Act:

Marginal Tax Rate

Single

Married Filing Jointly

Head of Household

Married Filing Separately

10%

$0-$9,525

$0-$19,050

$0-$13,600

$0-$9,525

15%

$9,525-$38,700

$19,050-$77,400

$13,600-$51,850

$9,525-$38,700

25%

$38,700-$93,700

$77,400-$156,150

$51,850-$133,850

$38,700-$78,075

28%

$93,700-$195,450

$156,150-$237,950

$133,850-$216,700

$78,075-$118,975

33%

$195,450-$424,950

$237,950-$424,950

$216,700-$424,950

$118,975-$212,475

35%

$424,950-$426,700

$424,950-$480,050

$424,950-$453,350

$212,475-$240,025

39.6%

Over $426,700

Over $480,050

Over $453,350

Over $240,025

Data Source: IRS.

As you can see, Americans will be paying generally lower tax rates on their income now, which should contribute to lower overall tax liability for many people. For example, a married couple with $100,000 in taxable income would have owed $16,307.50 under the old tax code. Under the new tax bracket structure, a couple with this income would owe $13,879, a savings of more than $2,400.

Of course, taxable income is just one piece of the puzzle and it's entirely possible that an American family would end up paying more under the new tax code. However, the lower marginal tax rates could certainly translate to a higher refund for many people.

The standard deduction is larger

One of the biggest changes made by the Tax Cuts and Jobs Act was the near-doubling of the standard deduction and the elimination of the personal exemption. For many taxpayers, the net result of this will be a better overall tax break.

For example, a married couple with no children would have been entitled to a $13,000 standard deduction and two $4,150 personal exemptions in 2018, for a total of $21,300 excluded from their taxable income. So, the new $24,000 standard deduction would indeed be better.

On the other hand, some households wouldn't be quite so lucky. For example, a family of four would lose out on $16,600 in personal exemptions, so the $11,000 increase in the standard deduction wouldn't quite make up the difference. It's possible that the newly increased Child Tax Credit could help make up the difference, but as we'll see in a bit, that won't be the case for everyone.

You have pass-through income

If any of your income comes from self-employment, or from a business you actively participate in that is structured as a pass-through entity (LLC, S-Corp, and partnerships are examples), there's a new 20% pass-through tax deduction you may benefit from.

For example, if you have a full-time job and do some consulting work on the side through an LLC, you may be able to deduct 20% of your consulting income on your taxes.

To be clear, income restrictions apply, so high-income individuals in certain types of pass-through businesses won't be able to take advantage, but this should be a big tax benefit to millions of Americans who have pass-through income.

You have young children

There were two major changes made by tax reform to the Child Tax Credit, which is available to parents and guardians of qualified children under age 17. Specifically:

  • The credit has been doubled to $2,000 per qualifying child, with up to $1,400 of this amount refundable.
  • The income phase-out for the credit is dramatically higher. For married taxpayers filing jointly, the credit doesn't start to phase out until AGI above $400,000 -- much higher than the old $110,000 threshold.

To be clear, this only applies to children age 16 and younger. There's also a nonrefundable $500 credit available for taxpayers who have dependents who don't qualify for the Child Tax Credit.

One big reason your tax refund might go down (and it's not a bad thing)

Early data suggests that on average, tax refunds are lower in 2019 than they were last year. For the week ending Feb. 1, the average tax refund was more than 8% lower than the same period a year ago.

The main reason for this isn't because taxes went up. Rather, it's because the Treasury's tax-withholding guidelines for employers were updated for the tax changes, and it looks like there are now fewer taxpayers who are having too much withheld.

In other words, if your tax refund went down this year, it could be because you got more money with each paycheck -- not necessarily because you didn't get a tax cut.

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